Linking ESG to strategy in the Asian financial market

In this podcast, Heidrick & Struggles’ David Hui and Martin Xiang speak to Agnes Tai, director of Great Glory Investment Corporation, where she models and manages a climate- and ESG-centric Greater China equities portfolio. Agnes shares her insights on the landscape of sustainable investment in Asia’s financial center and how these compare to other regions, as well as the effect of regulatory and investor pressure on boards. According to Agnes, ESG is no longer a nice to have but an essential consideration for securing capital to ensure a long-term growth.

Some questions answered in this episode include the following:

• (1:25) According to JP Morgan, sustainable investment has doubled in 2020 and it is further expected to rise significantly again. Could you please describe the landscape of sustainable investment in Asia's financial centers and how it may compare to other regions?
• (8:27) What is the role of boards of listed companies in driving sustainable investment and other types of ESG activities, given the amount of regulatory and investor pressure?
• (11:15) In Asia, how do you feel companies or boards are taking a leading role in embedding ESG into their company strategies? Is it happening? And what could they do more?
• (15:28) Do you think that leadership comes from the board or from the executive team?
• (17:59) From your extensive experience, what advice would you give boards that might not be as advanced as others in factoring ESG into their strategy and decision making? How can they make sure that they have the relevant sustainability expertise at the table?

Below is a full transcript of the episode, which has been edited for clarity.

Welcome to the Heidrick & Struggles Leadership Podcast. Heidrick is the premier global provider of senior-level executive search and leadership consulting services. Diversity and inclusion, leading through tumultuous times, and building thriving teams and organizations are among the core issues we talk with leaders about every day, including in our podcasts. Thank you for joining the conversation.

David Hui: Hi, I'm David Hui, I'm a partner here in Hong Kong at Heidrick & Struggles. I lead the CEO & Board Practice. Today, I'm joined by my colleague, Martin Xiang.

Martin Xiang: Hi, everyone. I'm Martin Xiang. I'm a principal in the Industrial Practice at Heidrick & Struggles' Hong Kong office. In today's podcast, we're speaking with Agnes Tai, director of Great Glory Investment Corporation. Agnes models and manages a climate- and ESG-centric Greater China equities portfolio. Across her 41 years of serving the financial community in Hong Kong, Mainland China, the United States, and Australia, she has established and managed investment companies, consultancy practices, and new business units within major financial institutions.

David Hui: Agnes, welcome to our podcast. Thank you for taking the time to speak with us today. Let me start with the first question. According to JP Morgan, sustainable investment has doubled in 2020 and it is further expected to rise significantly again. But, as we have a global audience, could you please start by describing the landscape of sustainable investment in Asia's financial centers and how it may compare to other regions?

Agnes Tai: David and Martin, thank you so much for having me, and good day to your audience. Now, for those in your audience who might not be very familiar with sustainable investing, it includes investment strategies ranging from ESG integration and stewardship to impact investing in listed and private equities. And, often, ESG—referring to environment, social, and governance—is being equated with sustainability. However, without sound governance, businesses won't be sustainable. So, David, you're so right about the growth and it's not only happening in the western capital markets. In Asia, inflow into ESG funds has been strongest in Japan, China, Taiwan, South Korea, and Hong Kong, with Japan in 2020 having the lion's share in ESG-themed assets under management (AUM in short). So, this year I spoke with 30 global asset owners and managers with AUM close to $20 trillion. And a common theme is that capital allocation into sustainable investing will rise rapidly and every investee company is being evaluated by their ESG performance to a varying extent. They want to see boards and senior management being committed to ESG and sustainable growth. Now, Europe has practiced sustainable investing for several decades; currently, around 50 percent of AUM employs ESG. Asia, and China, in particular, has been catching up quickly in the past three to five years. For instance, in Hong Kong, the number of green or ESG funds as authorized by our Securities and Futures Commission, or SFC, have grown rapidly to nearly 60, with one-fifth of them having been added in just the first seven months of this year. And they are suitable for retirement schemes for retail investors as well. I can take you through some major markets in Asia if you like.

David Hui: Yes, it will be very interesting to hear your views on some of the key markets in Asia—China, Japan, and, of course, Hong Kong.

Agnes Tai: I’d love to. So, we can look at some of the key drivers of this growth in Asia, namely investors, regulators, and public awareness. All these affect how companies and their securities are being assessed and valued. Asset managers and owners in Asia are increasingly targeting positive and measurable ESG outcomes in their portfolios, where investee companies are being evaluated with an ESG lens. In Asia, the leader is Japan. Japan's Government Pension Investment Fund (GPIF) has an AUM of $1.5, which is a touch larger than the Norwegian Sovereign Wealth Fund. They began the ESG mandate search in 2016 with an initial allocation in 2017, and, within three years, ESG-themed mandates that reached more than 15% of their AUM. In Singapore, the Monetary Authority of Singapore set up a $2 billion investment program in late 2019 to promote public markets investment strategies for long-term sustainable returns.

Coming back to our territory, Hong Kong, the Hong Kong Government has set up a green bond program, which was to launch in 2018. The HKMA, our Hong Kong Monetary Authority, is actually an AUM PRI (Principles for Responsible Investment) signatory and they partner with a number of other agencies led by the SFC in May 2020 in the Cross-Agency Steering Group that was set up to accelerate the growth of green and sustainable finance in Hong Kong. We all have heard about China's public commitment to peak carbon by 2030 and carbon neutrality by 2060. So, in China, the NSSF, which is our National Social Security Fund, has, in the third quarter of 2020, invited bids from international asset managers. They haven't done it for five years, so there was a gap of five years since 2015. And one of the three requests for proposals was surrounding responsible investing. Through my network, I’ve heard that they dedicated an ESG investment research team in the second half of last year. And I won't be surprised that the HKMA and soon the NSSF will require asset managers to offer an ESG component in their strategies.

South Korea has been doing the same: in January this year, the Financial Services Commission in South Korea announced a series of measures to encourage ESG and responsible investing. So, all Asian stock markets are members of the Sustainable Exchange Initiative and all have measures to encourage sustainable investing.

I want to leave you with one piece of very interesting information that you might already know, David and Martin. Hong Kong's stock market capitalization is around 13 to 14 times of our GDP, compared with just over two times in the United States of its GDP. So that shows us that global institutional investors are very active in our markets. And so, companies really need to take note. ESG is no longer a nice to have but an essential consideration for securing capital to ensure sustainable growth.

David Hui: Agnes, it’s very interesting, the information you have just given us and a lot of it is clearly driven by regulatory pressures and public pressures, etc. One of the questions that we get asked a lot in our work with clients and companies is what the role of boards of listed companies is in driving sustainable investments and other types of ESG activities, given the amount of regulatory and investor pressure?

Agnes Tai: That's a really good question, David. Boards have the fiduciary duties of exercising skills, care, and diligence in steering companies on the path of sustainable growth and long-term performance. Boards cannot rest on their laurels—they need to be forward-looking. And we're not talking about two to three quarters, we're talking about 15 to 20 years or longer into the future. Sustainable investing is done not only from the viewpoint of securing capital and finance to fund the operations of a company, but also to allocate resources strategically into investments that ensure the company maintains a sustainable competitive advantage over their peers in the industry. I can give you an example. This company in Denmark, they earned 85% of their revenue from coal-fired power plants 13 years ago. In 2009, the board took a major strategic shift to have 85% of heat and power come from renewable energy by 2040. And after a very long 13 years, certainly not easy, it is now the world's leading offshore wind power producer, with a 30% market share, and they are ahead of schedule. Ninety percent of their total energy generation already came from renewable sources last year. So, looking at fossil fuel companies, investors who invested in them are now facing the issue of stranded assets, as we estimate that 80% of their assets will not become fuel as the world shifts to clean energy to help slow global warming.

I can give you another very quick example before we move on. And that is the example of investing in opportunities due to ESG. A few years back, Cathay Pacific started investing in sustainable aviation fuel, SAF for short. And this can substantially reduce greenhouse gas emissions from their planes. But, when airlines globally demand SAF, that price (now several times higher than normal jet fuel) can come down, and when the demand is good enough, that potentially can be an additional revenue stream for Cathay Pacific.

David Hui: Thank you, Agnes. It's clear that the role of boards in driving sustainable investment and ESG is set and people understand it. In Asia, how do you feel companies or boards are taking a leading role in embedding ESG into their company strategies? Is it happening? And what could they do more?

Agnes Tai: If we look at ESG ratings, very few Asian companies actually attain above-average ESG scores. But there are a few that are rated AAA by MSCI, which is one of the major international ESG rating agencies. So, if we look at Swire Properties in Hong Kong and CDL in Singapore, they have incorporated sustainability for some years now. And today, they are the very few Asian companies who are included in the Dow Jones Sustainability Indices, both in the world and Asia Pacific. And it is a very, very high bar for them to be included, even when COVID-19 briefly affected financial performance. Investors are very happy to stay invested in them. And this takes commitment from the board to a devotion of resources over a long period of time. We're not talking about three quarters, we are talking about three years, or maybe 30 years. So, a number of good companies such as CLP or MTR in Hong Kong are also being highly regarded. So, coming back to ESG scores, I've looked at those rankings from a dozen service providers, both globally and on the mainland. And I read a lot of sustainability reports. I feel that most of the reports by chairpersons or CEOs are less forward-looking than what investors would like. And the commitments to embed ESG factors into strategies can come through much stronger.

For instance, goals and metrics are not often clearly stated, and very few would proactively report scope-three greenhouse gas emission data. Very few companies have committed to net zero or have a climate plan or adopt science-based targets, which is deemed as the gold standard in addressing climate risks. Now, having said that, many Asian companies are now aligning their businesses with relevant UN sustainable development goals. And during the pandemic, people have seen that some of the Asian companies are leaders in genuinely taking care of their employees, the customers, and the communities that they operate in.

One last point: what's interesting is that Corporate Knights, in their 2021 global 100 sustainable companies, have 16 Asian names in it, including Taiwan Semiconductor Manufacturing Company, Vitasoy from Hong Kong, Lenovo, BYD, CDL, Capitaland, a couple from Japan, two from Australia. As compared to the 143 Chinese companies that have made the Fortune 500 list, we note that while a higher ESG score apparently and seems to correlate with size of the company, sustainability is more tied to leadership. And most of our Asian companies are really ramping up at the board level to embed ESG into their strategies, their processes, and their procedures.

David Hui: Agnes, you mentioned leadership, do you think that leadership comes from the board or from the executive team?

Agnes Tai: That's a really good question. So, it is no secret that Swire Properties, which is ranked AAA by MSCI and is also on the Dow Jones Sustainability Index—their sustainability team has mentioned that it took them two years to be able to show all the benefits to their boards. At first, boards asked a lot of questions because they weren't quite sure. After two years, the boards were fully committed; they set up committees, they set up the teams—and their team is not small. The teams have around 10 people each, just like. So, in the past, boards have been taking a little time, but currently, because of all the pressures from the regulators and investors, boards are now really gearing up. It’s also partly because they have seen the benefits of adopting ESG best practices.

Let me give you some examples of the benefits. These come from speaking with six or seven Asian green-bond issuers last year. One of the benefits is that the investor space has broadened to now include ESG and sustainable investment communities, which then tend to stay a lot longer. So, the investors base is more stable, and the speed of raising capital is much quicker than when you used traditional instruments. And there are potential savings because, for sustainable loans and bonds, the coupons and the loan rates could be lower when the KPIs are being met. And then, throughout my interviews with 30 asset managers and asset owners, they pointed to reputation, brand loyalty, trust, and the ability to attract better talents, suppliers, community support, and even media coverage. And so, ultimately, having the right strategies isn’t all about all the risk; it’s also about capturing opportunities. And the boards are just now beginning to speed up on that one, although some boards are still a little bit behind.

David Hui: Agnes, I know my colleague Martin has some questions in particular around the roles and opportunities boards have in this space. I'll hand it over to Martin here.

Martin Xiang: From your extensive experience, what advice would you give boards that might not be as advanced as others in factoring ESG into their strategy and decision making? How can they make sure that they have the relevant sustainability expertise at the table?

Agnes Tai: After I address that I’ll come back a little bit to what boards who are already on the ESG journey can do to enhance the ESG practices. As to boards that might not be as advanced as some of the other ones, in my facilitating training in governance and sustainability for the Hong Kong Institute of Directors in the past seven years, I’m sometimes asked the question, “Should we hire a consultant to help with ESG?” I say, well, those who can guide your firm in materiality and data analysis and write very good stories are certainly very helpful. But for climate risks, especially transition risk scenario modeling to answer TCFD (Task Force on Climate-Related Financial Disclosures) recommended reporting, the consultants are also on a steep learning curve; so what can boards do? The best thing to do is to add a board member who knows corporate governance and has reasonable ESG knowledge or at least is able to ask the right questions. Or, better yet, one who knows the investment community or is respected by them. This person can help formulate strategy, act as a bridge between the board and the management, and also can speak the language of the investors. Now we see that shareholder activism, which is now predominant in the West, is beginning to happen in Asia. We saw what happened at Toshiba in June.

Boards that are just starting on an ESG journey can take a couple of very simple initial steps, one being to do a thorough internal assessment before they engage consultants, come up with all the right questions to ask, and see if they can internally answer those questions. Boards can increase the amount of time devoted to discussions around ESG. Boards can consider policies, strategies, and processes around ESG that can be enhanced. They can bring on somebody who knows ESG or has that sort of experience. They can read sustainability reports and buy-side analyst reports of their industry peers to gain some insights. And they can also get a better grasp of ESG materiality and perhaps ask for a risk register to be presented at every board meeting. So, from there, boards can actually rectify gaps and make proactive ESG decisions. And boards can employ executive search firms, renowned ones like yourselves, to identify independent directors with ESG knowledge. Now, let me very quickly address three points—boards that are well on the way of their ESG journey can also consider their own culture and dynamics and whether ESG issues are openly and thoroughly discussed before making informed decisions. They can make sure that there is a diversity of perspectives, which is what the stock exchange is driving at to avoid groupthink, and perhaps establish a sustainability committee at a board level.

Martin Xiang: Thank you, Agnes, for sharing all these helpful insights. Do you have any final thoughts you wish to leave with our audience?

Agnes Tai: Well, sustainable investing is becoming mainstream, if it’s not already. Corporate boards really have to make (ESG) a crucial part in fulfilling their fiduciary duties and they have to start now.

David Hui: Agnes, thank you so much for all your insights and information, I'm sure our listeners will find it very, very useful and we look forward to speaking with you again soon.

Agnes Tai: Thank you so much, David and Martin. It's been my pleasure.

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About the interviewers

David Hui (dhui@heidrick.com) is partner-in-charge of Heidrick & Struggles’ Hong Kong office and the regional managing partner of the Industrial Practice for Asia Pacific and the Middle East. He also leads the CEO & Board Practice in Hong Kong.

Martin Xiang (mxiang@heidrick.com) is a principal in the Hong Kong office and a member of the Industrial Practice.